GM PRO DOers! š
Part 3 of our L2 series is here. š„³
Today, we explore $IMX (Immutableās token) and $MATIC (Polygonās token, soon to be $POL).
Two Layer 2 tokens that have been around much longer than $OP And $ARB, which we analyzed last week.
This PRO report is a banger. Why? š¤
Because youāre about to learn about a whole new business model for Layer 2s. š
Optimism, Arbiturm and Base are very similar. We talked about this last week.
However, what Immutable is doing is unlike anything else. The economics and business model they have chosen for their L2 could be massive. š¤Æ
Polygon, on the other hand is transitioning from its own PoS (proof of stake) chain to an L2 (a first in the category). With this transition, theyāre also updating their token and its tokenomics from $MATIC to $POL.
Will this be a gamechanger? š¤·
All of this and more will be covered in today's report.
But before we do that... an announcement š£
Next week, on Tuesday, we're hosting yet another Eyes On Chain event in Discord where we'll break down the latest trends and opportunities in the markets so you can capitalize. š°
Our goal is to help you build and invest successfully in web3! In this event, we'll do just that, so I hope you'll join us.
When: Tuesday, September 5th, 12PM EST
Where: Web3 Academy Discord (Events & Calls channel)
This is an event that's available for everyone, but PRO & Founding members will receive an in-depth PRO report next Thursday, breaking down more than what we'll discuss during the meeting.
Regardless, we hope you can join us. If you're already in Discord, you can set an event reminder here.
If you're not in Discord, you can join using the button below.
Now, back to Polygon and Immutable... LFGGGG š
Economics of Polygon and Immutable
The economics of Polygon and Immutable are very different from the rest of the L2s.
Polygon POS (in its current form) is extremely unprofitable, since itās not an actual L2 yet. You might remember this Polygon Profit chart from our last reportā¦
However, by the end of Q1 2024, Polygon hopes to transition from a POS network into a proper L2 on Ethereum and thus remove a large part of these expenses.
Once it transitions, Polygon economics should look essentially the same as Optimism and Arbitrum.
Immutable on the other hand has been mildly profitable for a while, but with the spike in gas fees on the Ethereum L1 since March, its revenues were no longer able to keep up. šØ
So how does that make sense? If L2s are simply a reseller of Ethereum blockspace, how could Immutable not manage to be profitable like Optimism and Arbitrum have?
Well, thatās because Immutable has completely rethought the L2 economics and business model.
Immutable isnāt a reseller of Ethereum blockspace. In fact, they don't charge gas fees on their chain at all. š²
Instead, Immutable pays the Ethereum fees themselves so they can abstract away the whole āgas feesā part of blockchains from their users.
Yet, Immutable has still found a way to generate almost $9 Million in revenue since launching in 2021. š
You might be wondering, how is that possible?
š By doing things differently.
You may remember that Immutable is an L2 built specifically for games, which require a very specific and seamless UX.
As a result, they have built many of their own technologies on top of Immutable, including the Passport (a wallet), the Orderbook (which NFT marketplaces can build on top of) and much moreā¦ Just take a look below.
By doing this, they can control the UX and provide a much cleaner experience for gamers.
In fact, when using Immutable tech within games, users don't notice any blockchain specific things like gas fees, bridging or wallets. š¤©
What this also enables Immutable to do is take control over all of the token trades on top of Immutable.
Even though there are NFT marketplaces on Immutable ā like Rarible ā all of the trades go through Immutableās underlying Orderbook.
As a result, Immutableās revenues come from taking 2% of all trades that happen on its blockchain, regardless of the marketplace the user uses. This also enables Immutable to enforce royalties ecosystem-wide. š
Rather than being a reseller of Ethereum blockspace, Immutableās strategy is to build the best āblockchain real estateā for the gaming industry and then take 2% of every transaction in that economy.
By abstracting away gas fees, bridging, web3 wallets, and so on, Immutable believes its UX will be superior to other blockchains and L2s.
Thatās why they accept the high cost of Ethereum blockspace now. They believe that the surplus of trading volumes thatāll come in the future (because users will choose Immutable over others due to its UX) will make it all worth it.
During the bear market of 2022, this model was actually profitable, even with limited activity on the Immutable blockchain. The issue came as gas fees spiked on the Ethereum L1 earlier this year.
But, hereās some serious alpha:
Once EIP 4844 goes live on Ethereum in Q1 2024, L2 expenses should decrease by an order of magnitude (10x) at least.
That takes Immutableās current expenses from $4 Million/month down to $400,000/month, and puts Immutable right within profitability. š¤
Now letās remember from the L2 activity report from 2 weeks ago that Immutableās activity has lagged vs. the other L2s.
This is because it takes much longer to build a game than a DeFi app, yet the amount of games launching in the next year on Immutable is significant.
This means that Immutable will have a profitable business at current levels, with an incomparable UX and massive future growth potential of games and gamers on the way.
In terms of economics and fundamentals, Immutable appears to be the best positioned L2 of them all. š
That said, before we put all of our eggs in one basket, we need to of course understand the tokenomics of $IMX and its value accrual to token holders.
$IMX Value Accrual
Hereās the other great thing about $IMX: it has real value accrual! š
Immutable gives token holders the ability to stake their $IMX. While at the moment staking doesnāt have any function to it (like how staking your $ETH helps to secure the Ethereum network), those who stake $IMX earn a proportional share of 20% of the fees Immutable earns on all trades across their platform.
What this means is that of the 2% fees Immutable charges, Immutable actually only earns 1.6% (which is whatās shown in the charts above) and the other .4% goes to $IMX stakers.
Heads up though: to get your share of the earnings, you not only have to lock up your $IMX tokens, but you also have to complete at least one NFT trade during each payout cycle.
What I think is quite smart here is that rather than just sharing revenues with passive $IMX holders, they force you to stake your tokens (temporarily removing them from circulating supply and reducing sell pressure) and also force the user to interact with the chain (generating revenue and getting users familiar with trading).
Win-win. šŖ
When staking $IMX, the amount earned is unlike staking on an L1 where you receive a set % APY.
Instead, itās based on revenues and it varies as onchain volumes fluctuate. If Immutable reaches the growth levels we think it has potential to reach, then this yield may become significant for $IMX holders.
Before we move on to tokenomics for $IMX, letās quickly discuss the value accrual mechanism for $MATIC (soon to be $POL).
Value Accrual of $MATIC and $POL
As Polygon is a POS chain that has essentially copied Etheruem, $MATIC has the same value accrual mechanisms as $ETH:
Burning $MATIC with every transaction
Paying those who stake $MATIC to help secure the Polygon POS network
Now that Polygon POS is transitioning to an L2, it no longer needs validators to secure the Polygon POS blockspace. But it still plans to utilize staking.
One of the important things to understand about L2s on Ethereum is that in their current state all of them are centralized. As we pointed out in previous PRO reports, the hope is that one day they will decentralize their chains to further support the web3 ethos.
Polygon is planning to be the first L2 to do just that. In fact, Polygon has multiple L2s already and itās creating a āstaking layerā to decentralize all of them.
Once live, people holding $POL tokens (current $MATIC holders will be able to swap their tokens for $POL) can stake these tokens to help validate the sequence of transactions across the different Polygon Layer 2 networks. āļø
The staking rewards will come from transaction fees, inflation of its currency (more on this in the tokenomics section) and bonus rewards that any Polygon L2s want to offer. Polygon has termed the new value accrual mechanism of $POL as a āGen 3ā token.
A Gen 1 token can be explained via $BTC, an unproductive asset that does not give its holders any role in the protocol nor the incentives to perform such a role.
A Gen 2 token can be explained via $ETH, a productive asset that enables holders to become validators, stake and earn more $ETH.
Whereas a Gen 3 token like $POL is a hyperproductive asset that enables its holders to become validators and receive rewards. The difference is that validators with $POL can validate multiple chains (as many Polygon chains as they want) and every chain can offer multiple roles (and corresponding rewards) to those validators.
Below is a helpful diagram to understand what Polygon is creating.
To me, this Gen 3 token is a lot of āmarketing speakā for the $POL token. Ultimately, youāre just staking an asset to secure a network(s) and earning tokens in a % APY as a return. If that token does not have solid tokenomics and is not sustainable, then it doesnāt matter how many chains youāre securing.
We donāt yet know what sort of % APY staking your $POL will generate. š¤·
And in terms of burning $POL, we are currently unsure if this will continue, since there is no mention of this in any of their proposals. Since Polygon is planning to have an inflation rate of $POL, my expectation would be that they do continue to burn the tokens as transactions occur, but thatās still unknown at this point.
Unlike $OP and $ARB, both $IMX and $POL have real value accrual to their token holdersā¦ thatās what we like to see! šŖ
FYI: This is the case because these tokens and ecosystems have been around much longer than Optimism and Arbitrum. Generally, it doesnāt make sense to give value to users/token holders early on in your business as this is simply leaking value from the company.
You can think of this like dividends, companies generally donāt give dividends to shareholders until their business is well-established and cash flow positive.
Next up, we need to analyze the tokenomics of both $IMX and $POL to understand if the token and this model is actually sustainable.
Tokenomics of $IMX
Starting off with $IMX, its tokenomics are pretty straight forward.
$IMX has a capped supply of 2,000,000,000 with no inflation. Since itās been around since November 2021, itās almost half way through its token unlocks, meaning that more than 50% of its supply is already circulating (1,123,000,000).
As you can see, most of the token unlocks go towards ecosystem development. What Immutable does to grow its ecosystem is form partnerships with games and developers, using the $IMX token as a grant to incentivize them to build on Immutable.
While that may seem āshadyā, this is common business practice in most industries and what everyone does in crypto/web3 (...how do you think Polygon got all those brand partnerships?).
What I like about how Immutable has done this is they donāt just give the money away as grants.
Instead, they only unlock the tokens to the companies when they reach certain milestones (ie. launch game, reach $100,000 in NFT sales volume, etc.).
This pushes the teams to actually ship real products rather than take the tokens and leave.
Of course, whenever Immutable grants $IMX tokens, it creates more sell pressure on the token, however the hope is that in long-term the way they structure these deals is that it results in more activity onchain.
By the way, in terms of buy pressure for the token, outside of governance (which every L2 token offers), Immutable has created a system on their platform whereby 20% of all trading fees of NFTs must be paid in $IMX.
If you donāt have $IMX tokens when you make a trade, thatās no problem. Since Immutable controls the UX, they auto convert 20% of all trading fees into $IMX in the background without the user even being aware.
While this is an excellent mechanism to create buy pressure on $IMX, itās also important to note that this 20% is the 20% that is then paid to $IMX stakers, so itās likely that some of that is being sold, though Iām sure a % is remaining in $IMX for stakers who accumulate long term.
Finally, in terms of the market cap of $IMX, it currently sits at $664 Million and an FDV of $1.1 Billion, valued much lower than $OP, $ARB and $MATIC.
Iāll share my final summary at the end of this report, but once again, Immutable has nailed it!
Tokenomics of $POL
Ok, now letās explore the new $POL tokenomics and then weāll wrap up with a summary across all 4 L2 tokens shared in the last 2 reports.
At some point (likely in Q1-Q2, 2024), if all of the Polygon proposals are approved with the community, Polygon will transition its POS chain into an L2 and convert $MATIC into a new token called $POL.
When all of this happens, hereās how the tokenomics of $POL will look:
The supply of $POL will match the current supply of $MATIC (10,000,000,000).
There will be a 2% inflation rate of $POL. 1% for validators and 1% for ecosystem development.
The inflation rates for both categories are set in a way that they can't be increased. However, after a decade, they could be reduced if the community decides to do so through governance.
As of now, $MATIC's supply doesn't grow through inflation; instead, validator rewards are sourced from a set pool of 10 billion tokens that are gradually unlocked.
$POL will become the new governance token across the Polygon ecosystem.
$POL will be the token you must purchase and stake if you want to validate the network of Polygon chains.
Transaction fees on all Polygon L2s can be in any token (ie. $POL, $ETH, etc.), however fees will always be paid to validators in $POL (ie. all fees will be swapped into $POL to be paid out).
A burn mechanism for $POL is currently unknown.
Interestingly, Iām not sure that the tokenomics of Polygon's token will get better from this transition, considering it may be removing the burn and begin inflation of its currency.
After doing this research, Iām starting to think they had to make this move or they would have run out of tokens to subsidize the costs of securing the Polygon POS network.
You can see below that 12% of the $MATIC total supply was used to pay the Polygon POS validators.
However, all of those tokens have since been unlocked. To be fair, Iām not sure how many of those tokens have actually been paid out to date, but it's clear they donāt have a long term mechanism to cover their security costs (especially with fee revenue on Polygon being so low).
It seems to me that transitioning Polygon POS to an L2 is not just to create a more secure technology, but itās also being done out of necessity to not bankrupt their business.
If Polygon doesnāt make this switch, the only option they would have to stay afloat and afford securing its blockspace is to begin inflating their currency or to raise outside capital.
Itās very likely that this is the case for many other L1s as well.
To summarize, while this switch is better for the Polygon technology and economics long-term, it doesnāt appear that it fundamentally improves the tokenomics in the short-term.
Though, if this transition can ensure that Polygon can remain relevant in the race to onboard applications and users onto Polygon L2s, then of course, the fee revenues will eventually allow them to have a more sustainable token via future tokenomic improvements (ie. burning, turning off inflation, etc.)
So What Is the Best L2 Token Investment?
I want to make it clear that I think all 4 of these L2 tokens will perform well in the next bull market.
While they are in competition with one another, I think they will all grow in terms of users and applications significantly in the coming year and thus their revenues and tokens are likely to appreciate significantly too.
That said, I think there are two standouts currently:
The first is $IMX
If web3 gaming becomes as big as I think it will (to me itās already inevitable) then Immutable has the most to gain from that.
Immutable has built its L2 differently than all of the others, solving the biggest problem in crypto and web3 today: user experience (UX). No one can compete with a blockchain that has NO GAS FEES and a pure web2-like experience.
The only reason Immutable is not dominating in its activity numbers versus the other L2s is because itās focused solely on games, rather than general purpose use cases like all the other L2s (Immutable doesn't have DeFI, stablecoins, social media, PFPs, etc.).
Immutableās lag in activity is likely why it's valued at half that of Arbiturm and Optimism. Thatās also why its profitability isnāt quite there. However, when EIP 4844 goes live, Immutable has the most to benefit.
All other L2s will see a decrease in their expenses when this launches, but they will also see a decrease in revenues, as gas fees on L2s will be cheaper. Immutable on the other hand will see a decrease in its expenses and no change to its revenues because they donāt come from gas fees.
Combine that with no inflation and value accrual to $IMX holders and I think that $IMX is set up to do extremely well in the coming years.
The only real issue to the token currently is that a lot of $IMX is being sold by developers to pay for development but during a bull run, it should have little effect and also run out in the next 2 years.
So long as you believe that web3 gaming takes off, then I think that $IMX might be one of the greatest investment opportunities in this space, in terms of risk/reward. Not to mention if you stake your $IMX you can earn some nice passive income to go with it!
I think $IMX is the one L2 token that has a chance to decouple from the rest and significantly outperform the others.
The second standout is $OP.
Iām not sure that $OP will āsignificantlyā outperform $ARB or $POL, however if there was one token that I would bet on out of the 3, Iām currently favoring $OP.
The reason for this has nothing to do with tokenomics, as itās basically the same as $ARB and $POL, but more along the lines of I think they are setting themselves up the best in terms of partnerships ($BASE) and applications (Worldcoin, Sound, Farcaster, etc.).
Itās still too early to tell, so this is based on nothing but a hunch, which is why I own all 4 of these L2 tokens.
That said, Iām currently adding to my positions in $IMX and $OP, whereas Iām not currently doing so for $ARB and $POL.
I hope this 3 part L2 series was helpful for you to understand the L2 ecosystem as well as how to analyze web3 native businesses and tokens.
I'll leave links to the past reports here:
$ARB and $OP Tokenomics Report
Layer 2 blockchains will play a huge part in the future of web3. By reading this, you're very early and ready to capitalize on the opportunity. š°
Speaking of opportunities... Remember that we'll be LIVE in Discord on Tuesday for our Eyes On Chain event in Discord.
We'll go over the latest trends & opportunities the markets have to offer right now. I hope you can join us, using the Discord link below. š
Thanks for reading friends, and I'll see you next time. āļø
ABOUT THE AUTHOR
Kyle Reidhead
Founder of Web3 Academy and Impact3
Find him on Twitter
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Disclaimer: This article is for informational purposes only and not financial advice. Conduct your own research and consult a financial advisor before making investment decisions or taking any action based on the content.
